Why smart people in organizations too often mismanage Risks and make bad decisions?

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What is Risk?

The First step in understanding Risk Management and Decisions about Risk is to try to understand RISK itself! This is a challenging undertaking, a even though everybody may have an ‘idea’ of what risk is, when you ask them to define it precisely, most people will find it very difficult. In the Asian Risk Management Society, we had to set up a committee specially focusing on coming up with a definition of Risk that could be relevant for organizations trying to grasp the concept. It took the committee more than a year of weekly meetings to achieve that!! I am not going to give you the definition yet. In fact,I am going to need a few posts to define the notion of Risk. I will approach it from different angles to try to capture the complexity and essence of it while breaking it down in manageable chunks that can be absorbed easily.

First of all, Risk is nothing new. The relatively recent focus on risk issues in the media as a result of major corporate collapse and scandals should hide the fact that risk has always been around. Can you imagine a Life without Risks? Think about it one minute.. What IF everything was CERTAIN!! You could write precisely the diary of your life in advance as you would already know what is going to happen next. We would be safe but Life would be very boring actually!
Of course this impossible we cannot know for sure what is going to happen next in our life and organization, we can plan .. we can prepare ourself .. but there are so many things that could happen that will impact the final outcome. Ever since the cavemen had to fight for food until today’s modern corporate ‘game’, there have been dangers and opportunities lurking around.

Second, Risk is Everywhere! There is not a place on this earth where we are not exposed to some sort of risks and uncertainty. Trying to avoid risk is most of the time an illusion as you may be able to avoid a specific risk for example the risk of being involved in plane accident if you decide never take a plane, but you will still need to travel by other means such as car, train or boat (unless you decide to stay home all your life) and hence will be exposed to the risks associated with those means of transportation. One important point here is that you will also miss on a lot of opportunities as you are not willing to travel by plane, both work wise (passed on for promotions) and in your personal life (the partner of your life might be living in another country!!). Finally, even in the comfort of your home you could still be exposed to risk of plane accident if the plane crashes on your home. This happened a few years ago 2000 when the Concorde crashed on an hotel shortly after take off killing passengers and people on the ground! See article.

In conclusion of the first post on the notion of Risk, since Risk cannot really be avoided nor it can be ignored, then the ‘right’ thing to do is to embrace it, to domesticate it by learning more on risk management methodologies and techniques that will allow you to become an effective Risk Taker.